The anticipated removal of Iran’s economic sanctions could be the start of a new economic era. A new fiscal regime will be unveiled on 28-29 November in Tehran and 50+ oil and gas projects are expected to be offered for international investment in a mix of bid rounds and direct negotiations from March 2016.
The key to Iran’s potential is attracting foreign investment, however many investors will remember the widely unpopular ‘buy-back’ contracts that pre-dated the economic sanctions, and will be looking for more attractive terms before committing. Additionally the memory of Iraq’s 2009 licensing rounds will still be fresh, which saw producers commit to extremely low margins.
There were a number of critical flaws with the previous buy-back structure. The contractor was responsible for all stages and capital costs of development, in exchange for pre-agreed fixed cost recovery and remuneration fees. An operator which produced more than the planned amount received no compensation for the additional barrels. Contracts were signed for a period of 5 to 12 years and payments were amortised; as soon as the asset started producing or reached the production target, it was handed over to the National Iranian Oil Company (NIOC).
Iranian oil and gas opportunities
We expect the new Iran Petroleum Contract to remain tough, to satisfy Iranian hardliners, but ultimately change in a number of key areas. Our prediction is that contracts will be signed for periods of up to 25 years, more than twice as long as the longest buy-backs, and will cover: exploration, development, production and the possible use of Enhanced Oil Recovery (EOR)/Improved Oil Recovery (IOR). The remuneration fee is expected to slide according to the oil price in order to give companies potential upside.
We also expect that cost overruns will not have to be borne solely by contractors, and the capex ceiling will be removed, which were both strong negatives under the former buyback contracts. The remuneration fee is likely to float on a per barrel of liquids or per million cubic feet (mcf) of gas basis with a structure that could incentivise higher levels of production above the agreed target.
Iraq’s licensing round: the same, but different
The Iraq Technical Supply Contract (TSC) was structured around 2 components: remuneration fee and production targets. It would appear at first glance that although the remuneration fees bid were low, some of these were sufficient for some Iraq projects to generate an Internal Rate Of Return (IRR) above 20%. However, the only fields that have an IRR exceeding this are those that meet the triple criteria of being very large, brownfield and close to existing infrastructure.
The lessons learned from Iraq can provide valuable guidance for IOCs and internationalising NOCs. We expect that access to existing infrastructure will be key. As many of the contracts will be low margin, brownfield sites will provide the best return, and as the fee per barrel is low only the largest fields will make economic sense. Bureaucracy and regulatory hurdles are a significant challenge in Iran. From a logistical perspective, the cost recovery structure could lead to detailed scrutiny of project plans by the Ministry of Oil and potential delays.
Find out more about Iran’s new oil and gas fiscal terms and access the source data.
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None of the information contained in this report has come from any contact with the National Iranian Oil Company (NIOC) or the Iranian Government while sanctions preventing this have been in place.